The World’s Hottest Real Estate Market?

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Turkey’s biggest property developer has been the second-worst performer on the nation’s equity index this year, suggesting that investors see trouble in the country’s real estate industry.

Shares of the state-owned company, officially named >Emlak Konut GYO AS, >lost 11 percent this year, compared with a 38 percent rally on the Borsa Istanbul 100 Index. For Emlak, the year has been characterized in part by cancellations of major tenders, slowing house price increases, and a decision not to distribute earnings from 2016 as dividends.

These developments are signalling the start of a “challenging period” for both Emlak Konut and the industry in terms of profitability, according to Mehmet Gerz, chief investment officer at Ata Portfoy in Istanbul. Gerz rates real estate industry stocks at “underweight” and hasn’t included Emlak Konut in his fund for the past year. The company may opt not to pay a dividend for this year’s profit either, he said.

Turkey, which recently ended its run as the world’s hottest real estate market according to global real estate consultant Knight Frank, saw home prices rise less than 12 percent in July over the previous year, the slowest pace of increase since December 2012 and not much higher than the inflation rate of 9.8 percent. In Turkey’s two largest cities, Istanbul and Ankara, housing prices dropped by nearly 2 percent annually after adjusting for inflation, the biggest decrease in real terms since the central bank started publishing data in 2011. The cities are home to the majority of Emlak’s upcoming projects.

Murat Kurum, Emlak Konut’s chief executive officer, downplayed concerns over canceled project tenders and said the value of projects tendered this year was almost double the previous year.

“In the past we’ve repeated tenders three times and then completed them with a very strong multiplier,” he said in a phone interview on Thursday. “One shouldn’t make a wrong judgment on the sector based on a couple canceled tenders.” He said the company would “most probably” achieve its target of 8 billion liras ($2.2 billion) in sales by year-end.

Still, developments this year have “raised questions regarding consumer demand for the projects, potential problems about value creation from the existing land bank, financial conditions of contractors and future cash flow,” said Alper Ozdemir, an analyst at Oyak Securities in Istanbul.

Those problems could get worse for Emlak Konut if consumer demand doesn’t pick up.

The total net value of completed but unsold residential and commercial home stocks on Emlak’s balance sheet rose astronomically over the past two years, to 1.02 billion liras ($273 million) as of June 30 compared with just 11.9 million liras in December 2015, according to its financial statements. The company has another 38 projects still in development, according to its website.


For Sebastian Kahlfeld, a portfolio manager at Deutsche Asset Management in Frankfurt, recent tender results for Emlak Konut’s planned projects show the real estate sector is “stretched.” 

The number of new Turkish homes with a permit for residence that hadn’t been sold reached 776,700 in the second quarter of 2017, up from 32,000 in March 2013.

“People say Turkey needs 600,000 new housing units every year, but if there was a shortage, real estate prices would be ticking up a lot higher, which is not what we’re seeing,” Kahlfeld said. “I don’t expect anything in the short-term. But defaults usually come unannounced and if there was a big non-performing-loan in the real estate segment, I wouldn’t be surprised.”

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